Ms Yellen, who is scheduled to give the central bank's twice-yearly accounting on monetary policy to lawmakers on Wednesday and Thursday, will be closely watched to see if she deviates from the Fed's plan for four rate hikes this year.

Markets have been pricing in one or two increases, for the second half of 2016. Few analysts expect the Fed will raise rates at the next policy meeting in mid-March.

The Fed lifted the benchmark rate by a quarter-point in December, after keeping it pegged near zero for seven years.

"Sliding world stocks and prospects for global growth have many staking bets that Fed chair testimony... might acknowledge new threats to US growth and play down prospects for higher US interest rates," said Joe Manimbo, currency market analyst at Western Union Business Solutions.

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"Uncertainty over how global weakness would impact the US economy has caused the dollar to lose some of its safe-harbour sheen." The dollar dropped against the euro, to US$1.1293 per euro around 2200 GMT, from US$1.1193 at the same time on Monday. The greenback fell 0.6 per cent against the yen at 115.14 yen.

Ms Yellen's testimony comes as concerns about the US economy and Fed policy have contributed to the stock market's sharp decline so far this year and the dollar's recent selloff.

"There's a lot weighing on Yellen's shoulders tomorrow because now more than ever, investors are looking for her guidance," said Kathy Lien of BK Asset Management.

"A number of central bank officials have suggested that rates could remain steady next month and the big question is whether the Fed chair shares these views."

AFP

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